Plans to build new hospitals, schools and roads could be scaled back or even cancelled this year as the global credit crunch makes it more difficult to raise money for infrastructure projects.

Financing for a new fleet of RAF air tankers has hit snags already and analysts have voiced concerns over plans to raise about £2 billion for the M25 road-widening project, due this year.

It emerged last week that plans to raise £225 million from a bond issue to build a new hospital for the Maidstone and Tunbridge Wells NHS Trust in Kent had run into trouble.

Bonds issued to pay for infrastructure projects, built under the Government’s Private Finance Initiative (PFI), have become decreasingly attractive to investors because of their lower credit ratings. Since the start of the year, the bonds’ credit ratings have been lowered because of fears over the groups that insure them. Typically, PFI project bonds benefited from a top credit rating as high-rated insurers guaranteed returns to investors.

Ratings agencies such as Standard & Poor’s and Fitch Ratings have cut insurers’ ratings, amid concerns about the financial stability of the so-called monoline insurers, such as Ambac and MBIA, which guarantee bonds. This has had a knock-on effect on the ratings given to the PFI bonds that they insure. As a result, bond financing for PFI projects has almost disappeared.

Some institutions and pension funds cannot invest in PFI bonds because their investment rules allow them to put their money only into top-rated debt.

Olivier Delfour, global head of infrastructure and project finance for Fitch Ratings, said: “There is currently no significant appetite for insured bonds that were the preferred funding tool for PFI projects in capital markets. We have already seen some impact, with the [RAF] air tanker financing reverting back to bank funding.”

This year, plans to raise more than £2 billion from bonds and bank debt to fund a new fleet of air tankers for the RAF were dealt a blow when it emerged that bond financing was no longer viable because of lower credit ratings. This situation is likely to continue until credit markets recover - and, even then, financing will be expensive, Mr Delfour said.

Jonathan Manley, a credit analyst for Standard & Poor’s, said: “It may be that PFI projects can’t be achieved or get scaled back down. Certain investors are limited to what they can invest in.” PFI projects in future may be forced to raise money solely through more expensive bank financing, Mr Manley said.

However, those responsible for raising funds for the projects are confident that there is still an appetite for PFI bonds.

Mel Zuydam, the Highways Agency finance director, who is looking to raise about £2 billion for the M25 widening this year, said: “I’m watching the situation but [am] comfortable the financing will be available. It’s likely we may pay a premium, but we’ll wait and see.”

His views were shared by Andrew Rose, head of projects for Partnerships UK, which was established by the Treasury in 2000 to support PFI projects. “We’ve yet not seen any evidence of delays and banks remain active in the PFI market,” Mr Rose said.

Timothy Stone, who heads the global infrastructure team in KPMG, said that although it was getting harder to fund projects, with bank financing costing 50 to 60 basis points more than monoline-wrapped bonds, he expected credit conditions to pick up again by the end of the year.

“Around 5 to 10 per cent of projects could face delays, be scaled back or, in rare and extreme circumstances, be shelved, but the majority should ultimately be fine,” Mr Stone said.

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